1997: The music stops

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The boom in Asia’s capital markets came to a shuddering halt in the second half of 1997, only a few months after IFR Asia’s first issue. One by one, central banks across Asia were forced to float their currencies, triggering huge devaluations and mass defaults. By the end of the year, Thailand, Indonesia and South Korea had all turned to the International Monetary Fund for assistance.

Despite that horrendous backdrop, Asia’s capital markets continued to produce landmark deals. China Telecom’s Hong Kong listing ushered in a new wave of major red-chip listings and paved the way for the giant state listings that followed. In Australia, the government’s privatisation of Telstra showed just what could be achieved in a mature capital market.

IFR Asia 18 – July 5, 1997

Thai corporates face huge losses

In a move that is expected to cost Thai corporates billions of dollars, the Bank of Thailand last week effectively allowed a devaluation of its currency by announcing that it had abandoned a fixed-exchange system in favour of a managed float for the baht.

Following the announcement of the float system, the baht fell to 29.10 in the offshore market, a 19% drop. By the end, of the week, the baht had stabilised around the 29 level.

Since Thai corporates hold up to US$70bn in mostly unhedged foreign exchange liabilities, many Thai corporates are suddenly faced with massive losses. The lack of hedging is due to the often repeated promises from the Thai authorities over the past three years that they would not devalue. An avalanche of bankruptcies are expected in the coming year.

According to Bangkok Bank Thai corporates hold US$70bn in offshore debts, while short-term foreign debt is thought to be US$40bn–$45bn.

“We are at the stage of the cycle where financial distress is at the extreme,” said Credit Lyonnais Securities Asia in a report. About 33% of the Stock Exchange of Thailand market capitalisation has the balance sheet strength and cash flow necessary to survive the downturn but for the other 67%, it is a touch and go situation, the firm said.

IFR Asia 33 – October 25, 1997

The China call

China Telecom has priced the largest single equity offering yet to come out of Asia. The US$3.96bn offering was wrapped up as a red chip, with dual listings in Hong Kong and New York. The syndicate was led by joint bookrunners Goldman Sachs and China International Capital Corp.

Priced at HK$11.80 against a revised indicative range of HK$9.50–$12.60, up from an original target of HK$7.75–$10.00, the share price represents a prospective p/e multiple of 29.8 times 1998 earnings pro forma fully diluted. Some investors thought the issue overvalued, especially since the red chip index was trading weakly at around 24 times.

“Despite all its attributes how can it be priced at a premium to the secondary market?” asked an observer.

The international tranche was around 20 times covered. Over 6,000 entries were made in the book, but the bookbuilding process came at the same time red chips and H-shares plunged 17% and 15% respectively from the previous week. The retail offer closed on October 16. Subscription levels of 35 times triggered a 7.5% clawback.

Assets of the red-chip listing vehicle include a 98% market share of cellular telephone services in the Guangdong and Zhejiang provinces. The offering was marketed as a must-have for China portfolios because it offers exclusive access to the mainland Chinese telecom market. However, syndicate officials reported that enthusiasm for red chips has declined substantially since the beginning of the year.

IFR Asia 36 – November 8, 1997

The Andromeda strain

Despite the announcement of a massive IMF package, bond market sentiment in Indonesia last week remained poor. Offsetting the rebuilding of confidence brought by the IMF, was the announcement by President Suharto’s son, Bambang Trihatmodjo, that he would sue Bank Indonesia and Finance Minister Mar’ie Muhammad for the closure of Bank Andromeda in which he has a 25% stake.

Market watchers worried the suit might prompt President Suharto to reverse his decision to allow the closure of banks that are politically well connected. Such a move would signal a reversal of the IMF’s reform package.

Meanwhile, bankers said the IMF package, while it might have helped to stabilise Indonesia’s markets, has not changed the fact that liquidity remains tight. Defaults by corporate continue to be highly likely.

Indeed, some see the banking system as being less liquid following the announcement last week that 16 banks had been closed by the government. Depositors, fearing more closures, have reacted to the news by moving their cash to branches of foreign-owned banks.

“The money that the foreign banks are getting from increased deposits isn’t going back into the banking system. The banks are instead buying Bank Indonesia bills,” said one source.

IFR Asia 38 – November 22, 1997

Telstra boosts sluggish market

Despite a number of hurdles leading up to the completion of Australia’s largest privatisation to date, the A$14.2bn IPO of Telstra began trading on November 17 with the stock reaching heady premiums. The deal has given a boost to a sluggish market, with volumes on the Australian Stock Exchange surging in the first week of trading.

The share price in the A$14.2bn telecom privatisation closed the first day of trading at A$2.67, representing a 33.5% premium to the A$2 institutional price or a 36.9% premium to the A$1.95 retail price. By the end of the week, the stock had settled at A$2.71.

Through a partly-paid structure, the offer price for institutional investors was set at A$3.40 while retail investors were asked to pay A$3.30. Payment will be made in two instalments, with the second required after 12 months. Institutions, which have paid an initial instalment of A$2, are required to pay a further A$1.40 in 12 months. Australian retail investors are entitled to a A$0.50 discount on both instalments.

At A$3.40, Telstra has a forecast 1998 price / earnings multiple of 15.7 times and a earnings before interest tax depreciation and amortisation (EBITDA) multiple of seven times, which is higher than the same figure for any European telecom company.

Huge demand from domestic investors - around one in 10 Australians applied for shares - created an ideal aftermarket environment, with institutions receiving only between 20% and 25% of requested allocations.

The flotation apparently remained immune to the latest in a series of mishaps that may have sunk a lower-profile transaction. Over the weekend of November 15 and 16, when the issue was priced, pay-TV operator Australis Media defaulted on an interest payment on its US$610m high-yield bonds and killed a merger with Foxtel, a jointly owned subsidiary of Telstra and News Ltd. The breakdown of negotiations had “no impact whatsoever on the Telstra sale”, said an analyst.

Less than a month before the launch, Daiwa, which was lead manager of the rest of the world tranche, was dropped from the syndicate. The Japanese bank’s alleged involvement to the so-called sokaiya organisations in Japan led to its removal at a very sensitive stage in the Telstra deal.

Korea on the edge

A further 30% plunge in the won following the announcement of the US$57bn IMF rescue package demonstrates that Korean regulators have underestimated the power and potency of the market dynamics presently running amok in Korea. Domestic recognition of the dire situation and the fortitude to do whatever it takes to restore stability is needed now.

The won has plummeted nearly 90% over the last three months, exacerbating the risks and limiting the options which Korea has in refinancing the large amount of short-term foreign debt which is held by banks and corporates.

The crucial confidence building aspect of the IMF package is now in question. Both Moody’s and Standard & Poor’s downgraded the country’s sovereign ratings to the lowest investment grade levels. Meanwhile, Korea still has to approach foreign banks and investors to refinance short-term debts. Korea Development Bank, for example, has an estimated US$1.8bn worth of liabilities due within the next four weeks. The bank’s attempt at raising US$2bn in the bond market showed that it would have to pay 550bp over US Treasuries to get a deal done.

Adding yet another element of doubt to the equation, the true extent of Korea’s short-term refinancing requirement is only now becoming clear. The country’s short-term foreign currency liabilities total US$100bn, 40% higher than originally thought. Korean regulators must recognise this is shaking the confidence of a rattled market, and without investor confidence the immediate future is indeed bleak.

Swift and dynamic action is needed. Unified government support of the IMF rescue package has to be shown in order to restore international investor confidence. More importantly, Korea must show the fortitude to deal with the upcoming wave of debt redemptions.

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